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  • ECONOMIC TRENDS - RISE OF THE NEW RICH

    Grainne Gilmore
    Head of UK Residential, Research, Knight Frank
     
    Economic turbulence failed to curb the rise in the number of ultra-wealthy individuals last year, according to exclusive new figures produced for The Wealth Report.

    There are now 63,000 people worldwide with $100m or more in assets, according to Ledbury Research, which specialises in monitoring global wealth trends. The number of these centa-millionaires has increased by 29% since 2006 and is forecast to rise even further.

    But HNWIs were not spared from the challenges that faced all investors across the globe last year. Amid growing economic and political tensions, manifested most clearly in the eurozone crisis and the Arab Spring uprisings, many world stock markets fell sharply. Commodity prices were also volatile and the growth in average global real estate values slowed – with the exception of localised out-performance in some markets.

  • The global economy expanded, but the pace of growth was much slower than in 2010. The US economy grew by just 1.8% and GDP in the troubled eurozone rose just 1.6%. In contrast, Asia managed to chalk up economic growth of 7.9%, although even this was down on the 9.5% achieved 12 months earlier.

    The London School of Economics professor Danny Quah forecasts that by 2050 the world’s economic centre of gravity, a theoretical measure of the focal point of global economic activity based on GDP, will have shifted eastwards to lie somewhere between China and India. Professor Quah calculated that in 1980 it was in the middle of the Atlantic.

    Heading East

    Our global HNWI data also indicates a shifting emphasis to the East. There are now 18,000 centa-millionaires in the region covering South-East Asia, China and Japan. This is more than North America, which has 17,000, and Western Europe with 14,000.
     
    By 2016, Ledbury Research expects that this region will have extended its lead, with 26,000 centamillionaires, compared with 21,000 in North America and 15,000 in Western Europe.
     
  • On a country-by-country basis, the US will still dominate in 2016, with 17,100 centa-millionaires, but China will be catching up fast with numbers set to double from current levels to 14,000.
     
    “We believe the number and concentration of centamillionaires accentuates the trajectory of current global wealth flows,” says James Lawson, Director at Ledbury Research. “Trends seen in this wealth bracket are likely to be replicated in lower wealth tiers in years to come.”

    South-East Asian deca-millionaires (those with $10m or more in assets) already outnumber those in Europe, and are expected to overtake those in the US in the coming decade.

    These forecasts are influenced by the expected economic performance of countries in the Asia-Pacific region. While rapid GDP growth does not in itself guarantee a sharp rise in HNWIs, rapidly growing economies do provide key opportunities for large-scale wealth creation.

    “Individuals can become millionaires or multimillionaires through saving their earnings, a trend most commonly seen in more developed and established economies. But, apart from those who inherit wealth, most people who are very wealthy, say with assets of $10m or more, are business owners,” Mr Lawson says.

  • “To amass this sort of wealth means there must be an alignment between opportunity and ability. For those who make more than $50m, the opportunity usually arises because of a major liquidity event, and these are more common, and can be tapped into more readily, in fast-moving economies.”

    Mr Lawson adds: “Just looking at the wealthiest in some emerging markets, you can see the sectors where they are generating their wealth include natural resources, manufacturing or construction.”

    Willem Buiter, Citi’s Chief Economist, agrees: “As part of the process of fast economic growth, vast wealth will be created. The distribution of that wealth will be dictated by political factors as much as the economic process itself, but there will be high returns from investment in skills and education.”

    New World Players

    While there is little doubt that the emerging economies present the best chances for economic growth, not all countries will prosper at the same rate.

    Indeed, the International Monetary Fund (IMF) recently warned of the possibility of a “hard landing” for some emerging economies if the effects of buoyant credit and asset price growth, which have fuelled 

  • consumer demand in recent years, unwind.

    The IMF predicts emerging economies will expand by 5.4% this year and 5.9% next year. While this certainly marks a signifi cant downgrade from previous forecasts, it still outpaces the average GDP growth of 1.2% and 1.9% expected this year and next in advanced economies

    “Many poor economies have opened up and reached the modicum of institutional quality and political stability that are needed for fast growth and rapid catchup,” Mr Buiter says.

    This, in turn, will mean an end to Western hegemony in terms of output (see chart above). Citi forecasts that the North American and Western European share of world real GDP will fall from 41% in 2010 to just 18% in 2050. Developing Asia’s share is expected to rise from 27% to 49% in 2050. China will overtake the US to become the world’s largest economy by 2020, which in turn will be overtaken by India in 2050

    Citi research shows that while China and India are likely to grow rapidly over the next 40 years, there are other key countries with promising chances for growth that do not necessarily match the traditional assumptions about where future growth will emanate from.

  • For example, Russia and Brazil, which make up the so-called BRIC nations alongside China and India, do not make it on to Citi’s list of Global Growth Generators – or “3G” countries. Instead, Citi includes countries such as Bangladesh, Egypt, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka and Vietnam on this list.

    “All of these countries are poor today and have decades of catch-up growth to look forward to. Some of them, including Nigeria, Mongolia, Iraq and Indonesia, also have large natural resources that we hope will be more beneficial than they so often have been in the past,” Mr Buiter says.

    Mexico, Turkey, Thailand and Iran are also mentioned as countries to watch, as is Brazil, although Citi says major fi scal or political adjustments would have to take place before they would be eligible to join the 3G list.

    While these countries can expect rapid economic growth, much of the wealth already held in developed economies will be maintained, according to Citi.

    Measuring a country’s affl uence in terms of GDP per capita shows that Singapore currently tops the chart, with Norway and the US in second and third place respectively. 

  • By 2050, Singapore is expected still to be in the top spot, with Hong Kong and Taiwan moving up to take the second and third places. But the US, Canada, UK, Switzerland and Austria will all still be in the top 10, although the US will have dropped down to fifth place in the overall rankings.

    Uncertain Futures

    In terms of continued wealth creation, the world’s HNWIs remain upbeat. Less than a quarter are pessimistic about their future wealth prospects, according to the results of The Wealth Report 2012 Attitudes Survey.
     

    However, Tina Fordham, Senior Global Political Analyst at Citi, warns that the dissatisfaction with income inequality already being manifested in the Occupy Wall Street demonstrations will gain momentum, and that there could be a longterm recalibration between governments, businesses and society as a result. “It could take a decade or longer for the ‘new normal’ to emerge,” she says.

    Indeed, at this year’s World Economic Forum in Davos, income inequality was among the issues at the top of the list of countries’ current concerns, leapfrogging environmental issues, which dominated the global 

  • agenda for many years before the financial crisis struck.

    Mr Buiter agrees, warning that the political backlash against income inequality, both in advanced and emerging economies, could strengthen. “Governments may use more taxation instruments and globally there may be a further attack on tax havens. Recent governmental and intergovernmental activity in these areas is not a passing phase,” he says. “It’s going to be a tougher playing field for the rich.”